Energy Q&A: Why is Ofgem investigating the energy market?

Energy regulator Ofgem recently announced a full-scale investigation into the energy market, but how will it work and what are the expected outcomes?

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The energy industry, and in particular the big six energy companies – British Gas, EDF Energy, E.ON, npower, ScottishPower and SSE – have long been accused of being quick to raise their prices if their costs go up, but not so quick to do the opposite.

These accusations, combined with the fact that roughly 95% of consumers are signed up to the big six, have led to many questioning the competitiveness of the gas and electricity industry.

In this context, Ofgem’s in-depth market investigation was launched in June 2014, in a bid to ensure competition amongst energy suppliers, as well as improve customer service and consumer trust levels.

The investigation is being carried out by the Competition and Markets Authority (CMA) and is expected to finish towards the end of 2015, approximately 18 months after it began.

For those who don’t yet have one, a Feed-In Tariff (or FiT) is how you get paid for the excess energy your source may generate.

What is the CMA expecting to uncover?

In Ofgem’s words: “An investigation should ensure, once and for all, that competition works effectively for consumers, by bearing down on prices while driving improvements in customer service and innovation.

“It will also help provide the confidence that is needed for investment in the energy sector and complement Ofgem’s recent reforms to make the market simpler, clearer and fairer for consumers.”

The investigation follows an initial assessment of the energy industry carried out by Ofgem in conjunction with the Office of Fair Trading (OFT) and the CMA. The latter found competition amongst energy suppliers was not as healthy as it should be, particularly between the big six.

Doubts were also raised about the fairness of the relationships between suppliers’ energy generating branches and their retail counterparts. The current structure enables energy providers to buy energy from themselves and then sell it on to consumers. This practice will be investigated as it could potentially distort market prices.

The CMA will also examine energy companies’ rising profit margins and lack of any evidence that they are cutting their own costs or improving their customer service.

What does the investigation mean for me?

It is difficult to say what impact the investigation will have as it is still some time before the CMA reaches any conclusions. Ofgem has warned that, depending on findings, the big six could be forced to break up.

Although the investigation is likely to provide a positive outcome for consumers, no drastic changes are expected until the end of 2015. Consumers looking to take action now have been encouraged to reduce their energy consumption and switch to the most competitive energy tariff available.

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